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Strategies & Market Trends : US Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: gpowell who wrote (21)	1/6/2006 1:58:26 PM
From: gpowell	Read Replies (1) \| Respond to of 97

They say a picture is worth a thousand words: i10.photobucket.com This chart should dispel any fears that household balance sheets have deteriorated appreciably since 2001. The green line indicates that net worth, excluding housing and corporate stock equity, have remained “on trend” for over 50 years. The pick line shows total net worth and we do observe a bubble in net worth corresponding to the stock market bubble. Finally, the black line shows the percentage of total net worth households choose to hold in the form of real estate. As is evident, that percentage has changed since 1952 without a clear long-term trend (although I suspect a longer view will show it to be flat). Although it does confirm that today households are holding more of their wealth in real estate than any other time since 1952. I believe we can show that this variation in real estate equity holdings reflect portfolio optimization under various assumptions of expected and actual inflation and expected returns in other assets. Note that we do not observe liabilities increasing with the stock market bubble. Nor should we expect to see liabilities or consumption increasing appreciably should it be confirmed we are in the midst of a housing bubble. What is evident from reading the various threads predicating economic doom, is that many individual posters have the mistaken notion that household’s consume based upon their current income and/or current net worth. Thus, these individuals take it as fact that as home prices appreciate individuals have pulled equity gains out to spend on consumption items and that, once the housing bubble corrects, households will be saddled with enormous debt and the economy will thrown into an economic cycle of depression - the solution to which is monetary pumping (and hence inflation) in order to bail out debtors. The preceding is nothing more than the well-known underconsumption-glut debate that seems so prevalent in the writings of amateur economists (although Keynes’s took up the argument in his “general” theory). These arguments are perhaps to be expected from amateurs, gifted or otherwise, who seem primarily concerned with short-term phenomena, and consequently base all of their logic on flow dynamics and seem completely ignorant of the fact that flow dynamics are bounded by the longer-term trends in wealth/knowledge creation. On the individual level this means that households do not base today’s consumption on today’s income, but rather on an estimate of their lifetime income. This is the well-known hypothesis of household spending patterns known as the permanent income/lifecycle hypothesis (PILCH), which will be the subject of a latter post.